Category: Economics

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Economics

[2351] PEMANDU’s GDP folly

The Najib administration intends to make Malaysia a high-income country and that alone with the end goal. Here is the problem: a project is supported not because it is viable, but because it increases the gross domestic product (GDP) — or the gross national income (GNI) depending on context — of the country.

The latest case in point is the 1Malaysia email, which the PM has said that it will increase the GNI by RM39 million… by 2015.[1]

Let me say that this is mindless. It is so because while it does increase the GDP, it will increase it only temporarily. Without viability, it cannot sustain economic growth and make permanent a state of high-income. The focus on the GDP is as good as a project producing a million toilet bowls just because it increases production and hence the GDP, never mind that there is no requirement them.

One commits to a project because there is a need or demand for it. It should not be done just for the sake of increasing the GDP and the GNI. These statistics are not financial statistics. They are macroeconomic statistics for good reasons. Do it for the sake of increasing the GDP frequent enough and soon business failures will be the norms. Given that the government is at the center of it, so too will be the events of bailout.

The GDP and the GNI are descriptive statistics, not prescriptive statistics like the way PEMANDU is using it. These macro statistics are descriptive because only organic growth are sustainable. Once one makes these macro statistics prescriptive, then we will get the nonsense like “a particular project contribute to the GNI by so and so ringgit.” We will get PEMANDU.

Financial statistics can be used prescriptively to ensure viability of a project. Macroeconomic statistics mostly do no such thing. The GDP, for instance, measures what have been spent and says nothing whether a project should be invested in or not. Dig a hole for RM50 million and fill it again for another RM50 million, then the GDP will increase by at least RM100 million. The question whether that action is productive cannot be known through the GDP.

All the more outrageous is that the 1Malaysia email project is projected to contribute RM39 million by 2015 to the GNI. Ladies and gentlemen, the GDP of Malaysia for last year was more than RM600 billion. That is RM600,000 million, just in case the contexts of million and billion need clarification. The GDP numbers are so big that they are usually rounded up to the nearest billion. RM39 million will not typically register in any general statistics.

Yet, the 1Malaysia email project’s celebrated point is its contribution to the GDP.

That is a good joke.

My suggestion is this: take out the reference to individual projects’ contribution to the GDP.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — This is followed by the RM250 million investment by Pensonic Holdings Bhd to build its manufacturing hub and international distribution network over 10 years. The project will see a GNI impact of about RM500 million and create 850 new jobs by 2020.

The third project comes under the Malaysia Administrative Modernisation and Management (Mampu), which will invest RM3.26 million to improve the electronic services provided by the government and is expected to create 155 jobs.

The fourth project will come under the communications content and infrastructure national key economic area. It involves Tricubes Bhd, which will invest RM50 million, to develop a web portal for all Malaysian citizens above the age of 18 by 2020.

The 1Malaysia email project is expected to contribute RM39 million in GNI by 2015. [7 new ETP projects with RM901m in investments. Roziana Hamsawi. Zaidi Isham Ismail. Business Times. April 20 2011]

Categories
Economics

[2341] Too late for the rest of the Malaysian stimulus to be of any use

You know how that one particular argument against fiscal stimulus goes. There is a temporal mismatch between crisis period and the actual spending. The bureaucracy and incomplete information act to delay the implementation of the stimulus. If transparency is of a concern, then it will further affect the timeliness of the stimulus spending. The crisis may end well before stimulus spending is done, making the stimulus useless and may even hurt the economy by crowding out private spending.

Well, there is not a theoretical concern. Malaysia is a concrete example.

As of March 2011, more than 2 years after the RM67 billion stimulus spending was announced, more than 20% of spending component of the stimulus (which was really RM20 billion and not RM67 billion; RM7 billion of actual spending as announced in the first stimulus package and RM13 billion for the second) has yet to be spent. This is recorded in the Hansard: read page 74 of the Hansard dated March 29 2011.[1]

Twenty percent unspent as of March 2011.

Now, consider that the Malaysia economy might have recovered as early as December 2009. And everybody knows that the first quarter of 2010 grew by 10.1% from a year ago in constant prices. So, how much stimulus money had been spent by the end of 2009?

December 2009 is an important point because it is arguable that the economy did not need any stimulus by then anymore, if one believes in the efficacy of stimulus spending.

If the growth of the stimulus spending had been linear, then by December 2009, about 30% would have been spent, which is about RM6 billion. To be honest, the spending is unlikely to take a linear function. I personally suspect the figure is lower. Nevertheless, it does give you an idea how much money could have been spent by December 2009.

The point I am driving that it is possible that a majority of the spending was useless as far as cushioning the recession.

The 30% figure is obtained by assuming that nothing was spent prior to the announcement of the second stimulus package in March 2009, which is, really, not a bad assumption. We know that by May 2009, only three quarters of a billion of the first fiscal stimulus was spent. Only half a billion was spent by March 2009. Given that the economy lost RM20 in the first quarter of 2009 compared to a year ago,[2] half a billion was nothing.

Contrast the RM6 billion money spent with this: between 2008 and 2009 alone, the economy contracted by RM64 billion in nominal terms.[3] Remember that the source the recession for Malaysia was reduced international trade. In the same period, net exports itself fell by RM23 billion in current prices.[4]

I also wonder how much resources had been deprived from the private sector due to government spending. The crowding out effect is a concern given that a considerable chunk of this spending was done in time when the stimulus is not required. Signs of crowding out were seen as early as July 2009.

If one accepts the excess capacity argument that government spending does not crowd out the private consumption or investment because of excess capacity due to low demand in times of recession, then that argument has become very tenuous with the spectacular growth seen in the last several quarters. Meanwhile, the crowding out argument becomes much, much stronger.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Pakej rangsangan ekonomi pertama berjumlah RM6.695 bilion telah dilaksanakan dengan prestasi perbelanjaan mencapai 93.2 peratus. Pakej rangsangan ekonomi kedua terbahagi kepada perbelanjaan fiskal dan bukan fiskal berjumlah RM60 bilion daripada peruntukan fiskal yang berjumlah RM13.26 bilion. Prestasi perbelanjaan setakat sudah hampir 77 peratus. Jadi masih ada sedikit lagi tetapi nampaknya sedang berjalan dengan baik. [Page 74. Hansard. March 29 2011]

[2] — See Gross Domestic Product at Current Prices 2007 – 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

[3] — See page 5 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

[4] — See page 48 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

Categories
Economics

[2339] The context of wealth inequality matters

Wealth inequality can be worrying. That does not mean all wealth inequalities are worrying. The concern for inequality in this sense is overblown. Up the Gini coefficient and the trumpet is blown to sound the alarm without accounting for its context.

One out of a few ways wealth inequality can be worrying is when a small fraction of the society owns almost everything while the rest lives under abject poverty. For the majority, they are threatened by starvation almost every day. They have limited access to education and medicine. Their chance to escape poverty is close to zero.

This is a case when there is something in the economy preventing the rest from having their welfare improved. It could be poverty itself twisting the incentive system to encourage individuals to focus on current consumption rather than investing for the future (it is hard for kids to think about ABC when the stomach is growling), dictatorship (it might be the interest of the leadership to suppress the masses through heavy taxation), slavery or really, anything.

In this case where wealth is monopolized by the very few, total and average wealth of a society does not reflect the actual welfare of the society. If one wants to be precise, perhaps the welfare of the median member of the society. Take the rich outliers out and only then total and average wealth begin to reflect societal welfare.

Note that what is worrying here is not the inequality itself. It is the factors that make such inequality possible in the first place. The solutions can be interesting but that is not the reason I am writing this.

What I want to demonstrate is a situation when wealth inequality is not a concern. It is a case where the top fraction of the society disproportionately owns more than the rest of the society, but the rest lives rather comfortably — they can afford to own cars, they can afford to obtain a certain level of education, they eat well, etc. The median lives a comfortable life.

The wealth inequality of the society, however unequal wealth is distributed, does not say anything about the welfare of the society. Take the rich outliers out and total and average wealth will give a message that the society is doing pretty well.  In this sense, inequality is not a concern.

The point I wish to highlight is that inequality by itself is not necessarily a concern. What makes it matters, or not, is the context.

For those who place too much concern on inequality, especially on the Gini coefficient, I have a feeling they are not accounting for the context.

Categories
Economics

[2335] Free trade in rice is good for Malaysia

The Food and Agriculture Organisation recently warned food prices are at record levels in both nominal and real terms since the entity first published its Food Price Index in 1990. The International Monetary Fund stated this is unlikely to be a temporary trend.

Rice generally has not shown the kind of increase exhibited by other foodstuffs, however. For Malaysia, where the majority considers rice a staple food, this is good news. Yet, it is probably just a matter of time before prices begin to increase.

Rice prices did hit outrageous levels in the past years. In 2008, it rose so high that it triggered some kind of a panic in a number of rice-consuming countries.

In Malaysia, shortage was reported in some places. The Abdullah administration tried to address the concern by purchasing an emergency supply from Thailand.

Implementation of rice exports ban by several of the world’s largest exporters of rice exacerbated the increase in price. Two particular countries that imposed the ban were India and Vietnam. Both make up more than 25 per cent of the world’s rice exports currently.

The impact of high rice prices, the role of rice as staple food and the implementation of exports ban are important while considering the following fact: According to the agriculture and agro-based industry deputy minister, imports fulfilled 30 per cent of Malaysia’s domestic rice consumption in 2010. Malaysia sources some of its rice supply from India and Vietnam.

The protectionist policy works for exporting countries by isolating domestic prices from international ones, if the goal is to have low prices in the domestic market. With less competitive demand for domestic rice, domestic prices will fall or at least it will not rise as fast as world prices given specific circumstances.

Governments around the world are aware of the adverse effects of high food prices for their respective society. Examples are aplenty.

In 2007, Mexicans took to the streets protesting against rising corn prices. Rising food prices — specifically bread — is partly fuelling the ongoing protests and revolution in the Middle East.

In short, at the macro level, a ban benefits the exporting countries at the expense of the importing ones.

What solved the issue of rising world prices was the financial crisis that began soon afterward. The protectionist policy gave way to other pressing concerns.

The respite from expensive rice is appearing to end. Eventually, the concern for rice supply and prices will take centre stage again and so will the protectionist policy of exports ban.

The concern is not theoretical. India continues to maintain an exports ban on non-basmati rice. Myanmar recently imposed a ban to slow the rising price.

For importers of rice, it is in their interest to have exporters remove the exports ban. That will mitigate the rise of global prices. This is a concrete example of how free trade benefits Malaysians and how protectionist policy hurts.

There is a silver lining to all this, if it could be called that. Rising prices coupled with the prevalence of exports ban is causing countries like Malaysia to boost its own rice production. Yet, a domestic production boost is at best a second best alternative to the free trade scenario.

The free trade scenario is cheaper in terms of opportunity cost. Trade enables specialization and that frees up resources for other more productive endeavors that Malaysia might embark upon.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on March 24 2011.

Categories
Economics

[2334] Sabah, immigration and unemployment

There is a popular allegation that illegal immigration, or even immigration as a whole, is the culprit behind the level of unemployment Sabah is experiencing. I am unsure how accurate that is.

First of all, while the unemployment rate of Malaysia nationwide was about 3.6% in 2009, the unemployment rate in Sabah was 5.5%. The difference is not too big.

Secondly, I think the allegation is mostly due to bias against immigrants in Sabah. Immigrants are simply easy scapegoats.

I recently came across statistics pertaining the labor market of Sabah. Here is a simple graphical representation of the behavior of labor force size and unemployment rate from 1982 to 2009.

The labor force is measured in thousands.

Here is a graph with change in labor force instead of just labor force size.

Note what happens to the unemployment rate each time there is a spike in change of the labor force.

The only edit I did to the data was to fill in two data points into the series, which are absent from the original dataset. The edit is innocent: I took the average of the year before and after for the missing points, which are year 1991 and year 1994.  The data is publicly available at the Department of Statistics.[1]

I drew the particular period because those are the years available in the document. There are not too many data points to play with.

I admit that that is unscientific but the graph shows that the increase in labor force corresponds with a noticeable drop in the unemployment rate. Something happened there. Was it the roaring nineties? Maybe but I really do not know.

The increase in labor for is likely due to immigration (legal immigration, by definition, I would guess). It is highly unlikely the nearly 300,000 or 35%  increase in labor force between 1995 and 1996 was due to natural factors. It was likely due to increase in immigration. There has been allegation that immigrants were granted citizenship status liberally in Sabah. This might be a smoking gun.

In that way, I am using the change in labor force as a very imperfect proxy. Nevertheless, I think the change in labor force is a somewhat good proxy. A sudden change is likely to be caused by immigration, given the history of Sabah.

I ran a simple regression just to see if preliminary results (i.e. no cointegration tests although the model did pass a structural test; simple reading of the results also suggests that there relationship is not spurious but residuals are not normally distributed) would go against the conclusion one would get from the graph above.

I found a significant relationship between the labor force and the unemployment rate: An increase in labor size reduces unemployment rate. Through the proxy I mentioned, the conclusion might be that immigration reduces unemployment rate, on average given all else constant.

One reason this might be true is that there are more economic activities with larger working population. I do not think that is controversial at all.

So, it does not support the allegation that immigration adversely affects the unemployment rate in Sabah. I would assume that the conclusion would hold for illegal immigration.

A better model would probably include the periods of economic expansion and recession as well as the GDP in one way or another. Having actual number of immigrants would be great. Looking for the GDP of Sabah up to 1982 might a little bit time consuming for a blog entry. If any of you have it, do send it my way. I might do a more kosher regression model with it.

Of course, it is quite possible that the relationship is reversed but again, given the history of Sabah where massive immigration was welcomed due to political consideration, I think this is more of a case where immigration affecting unemployment rate.

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[1] — see Principal statistics of the labour force, Sabah, 1982-2009 by the Department of Statistics Malaysia.